A big demand for space and new configurations of that space

Lisa and Lou Pektor operate PennCap Properties in Bethlehem, a commercial leasing force in the region.

Formed in 2011, PennCap Properties of Bethlehem owns and operates more than one million square feet of leasing space since it bought a portfolio of 32 Lehigh Valley Class-A office, industrial and flex properties from Liberty Property Trust for $124 million in May that same year.

Offering their take on the commercial real estate market in the Greater Lehigh Valley are PennCap’s Lisa Pektor, regional president, and her father, Lou Pektor, vice president.

Lehigh Valley Business: How much has the commercial real estate market picked up over the past year in the Greater Lehigh Valley?

Lisa Pektor: We have definitely seen the prospects stay fairly steady the past year and a half. The new buildings in the NIZ [Neighborhood Improvement Zone in Downtown Allentown] are leased up before construction. They have pretty high occupancy.

In the Philadelphia region, projected deliveries are showing 850,000 square feet in new construction of office product. There is only 850,000 square feet of office space slated for completion within the next 12 months.

Though you are seeing new construction, there is big demand for space, especially larger floor plans. It’s definitely a catalyst for new construction.

There are some submarkets such as Stabler [Stabler Corporate Center in Upper Saucon Township] that have zero vacancy. You’ll have higher rents, $19 to $23 per square foot; that’s what you would need to get a new building out of the ground. The market is at that level in that submarket.

LVB: What’s your take on the office markets in the Valley?

Lisa Pektor: Portfolio-wide, we are at $12 a square foot for the average rental rate in 2011. In 2014, we are at $19 per square foot. On flex space, we were down at $4.25 per square foot and now we are at $5.65 on average.

Office is a little more difficult to judge. People have greater capability to work remotely. We may see more companies from New York or New Jersey coming here.

It also gives offices the ability to not need as much traditional closed office space. Kind of what Jones Lang LaSalle is doing. [The commercial real estate services firm is opening a new location in the Lehigh Valley.] They are having a place where they can meet clients.

I think you are going to see more of that in the future. So it’s really hard to predict office because of changes in technology.

I think the configuration is different. [There could be more] two to three-person conference rooms, two breakout rooms.

LVB: What are the prime indicators for the success or failure of commercial real estate in the region?

Lisa Pektor: You don’t have easy access to capital. I think it’s more difficult for a project to fail but that also causes some constraints. That time might be cause for a developer to not move forward with a project.

There’s a lot more regulation from an environmental perspective. We’ve always had a lot of constraints.

LVB: With the recent influx of office tenants moving into the cities, particularly Downtown Allentown, do you see continued growth in the suburban office market of the Valley? Do you see future growth for the office market in nearby cities such as Bethlehem and Easton?

Lisa Pektor: Stabler is its own niche market. It still has ease of access. It is a preferred location for those reasons. You still see office locations with easy access for highways as preferred.

Lisa Pektor: It does take a very long time to get a project approved, while an urban project has less constraints in that regard. Especially now that Bethlehem has the CRIZ [City Revitalization and Improvement Zone tax incentive designation]. Young entrepreneurs and young professionals coming to Pennsylvania seem to favor Easton.

It takes a significant amount of time and money to develop a green-field site, whereas an urban location has less constraints and restriction with that regard and therefore the cities have an advantage in realizing new construction earlier as the market demand increases.

Gretchen [Longenbach], as economic developer for the city, and Mayor [Sal] Panto have done a wonderful job of positioning Easton to be a prime market for new growth.

Young professionals and entrepreneurs prefer an urban environment and find it stimulating, especially since Easton has really created a “live, work, play” atmosphere.

LVB: What noticeable trends have you seen in the Valley over the past few years? Where do you think commercial real estate is heading?

Lisa Pektor: We are seeing new configurations in the office market. There’s a tremendous amount of females [in the office market], so we’ll have mothers’ rooms coming into play that we haven’t had before.

They certainly want to see that the building is efficient, saving energy, so we are looking at some automated systems, LED [light-emitting diode] lights. They are not taking a building off the table because it is not a LEED [Leadership in Energy and Environmental Design] building. …

The supply and demand ratio will catch up and equal out by 2017. It’s enough time for new buildings to gain momentum and supply to come back online. You will have some vacant spaces you are building into the building.

Lou Pektor: The path seems to be steady and positive. The market overall has pretty good traction. We’re geographically well-suited, economically well-suited.

Lisa Pektor: I think the whole Lehigh Valley will benefit from LVEDC [Lehigh Valley Economic Development Corp.]. LVEDC got those key people to meet in the Lehigh Valley [for a Foreign Direct Investment tour and program for international investors at Hotel Bethlehem]. That speaks volumes about what the Lehigh Valley can do in the next level.

LVB: In the industrial market, do you see the warehouse/distribution boom ending anytime soon? Is this growth sustainable in the Valley?

Lisa Pektor: I don’t know if it’s sustainable long-term. I definitely think the shift to e-commerce is not going to be a trend that reverses. You’re just going to continue to see growth.

My concern with big-box warehouses is you don’t know what new technology is coming down the pike. It’s more difficult to predict.

Lou Pektor: It’s become a 30-foot ceiling, even 18 foot [ceilings] are gone. We’ve got distinct markets here. I think forward-looking people are looking for what can be done for their employees.

Lisa Pektor: Companies are making decisions based on their employees’ drive time. Flowserve made their decision to locate at 1480 Valley Center Parkway [in Bethlehem] for several reasons.

Aside from receiving economic incentives from Northampton County and DCED [Department of Community and Economic Development], they also wanted the new office to be centrally located for employees.

In analyzing the drive times of employees during the site selection process, the company decided it wanted to strategically target sites between Schoenersville Road and Route 512. The layout of the building, amount of parking and the cost of operating the business in Pennsylvania verses New Jersey were the factors that caused Flowserve to choose our specific building.

LVB: What types of commercial real estate developments does the region need? What do you think is lacking?

Lou Pektor: For some reason, we haven’t landed a big pharmaceutical company. That would be a shot in the arm for the Lehigh Valley. We need a bio-pharma tech cluster.

Lisa Pektor: A bio-tech park, leased or shared among people, similar to what Baker Institute [at Lehigh University] is doing, helping a company take root, get capital and get set up – and once they create a product and get successful, [they leave the tech park].

Those are important to any kind of economy, especially in the future. I think that’s the kind of concept [we need] on the east part of the Valley. I think something like Tau [a planned post-incubator project in South Side Bethlehem] would be very successful.

Lehigh Valley International Airport, it certainly needs to turn things around a bit, offer a few more options for airlines. Transportation is a key component for attracting investors.

Reporter Brian Pedersen covers construction, development, warehousing and real estate and keeps you up to date on the changing landscape of our community. He can be reached at brianp@lvb.com or 610-807-9619, ext. 4108.